Gladstone Land was the first farmland investment firm to list a real estate investment trust (REIT) on the public markets when it raised $50m on the Nasdaq in January 2013. The REIT owns and leases fruit and vegetable farms across the US, but is now considering expanding into other crop types and earlier this year it hired a new acquisitions manager for the Midwest. It also announced its first dividend increase this year. Here, David Gladstone, the company’s founder and chief executive, tells Agri Investor how the business came about and how it operates.
How did you first get into farmland investment?
It started when a friend and I had an opportunity to buy a large strawberry operation in California. We bought Coastal Berry Company from Monsanto in 1997 and turned it around in two years to be nicely profitable. I bought my friend out in 1999 and continued to run it until 2004 when I sold the operating business to Dole. When we sold it we had about an 80-person staff running the day-to-day operations and 2,500 workers in the fields: they joined Dole and are mostly still there. I continued to own the land and this is where the buy-and-lease strategy we operate in the REIT first really came into being.
What were you doing before Gladstone REIT?
I ran a group of public companies, had a buyout fund, a lending fund and a REIT that invested in commercial and industrial real estate. I had been in business for 20 years lending and investing in small- and medium-sized companies before the berry operation came up.
How did you come to launch what was the first listed farmland REIT?
So I kept the farms that were rented to Dole and then began to look at buying some more farms before the 2007-2008 recession, although that pushed me to put buying on hold. But around 2011 and 2012, our team here cranked up the acquisitions again and in January 2013 we took the company public. Farmland leasing is a very established market in the US; in California there are families that have lived off leasing farms to farmers for generations. Every now and then we buy from them and become the new landlord. We don’t take the farming risk so our income is very stable.
What are the challenges of the buy-and-lease model?
It can be hard to pick tenants. Although as a prior farmer in California, I am automatically part of a club and it’s the same in Florida. So it soon becomes easy to determine which farmers will be good tenants and which will not.
What is the end goal and exit opportunity for the farms you acquire?
We don’t buy farms that we think will be developed into businesses or schools or offices; that isn’t our intent. We buy land that is oriented to farming for the long term. But maybe over time, one day some will be sold to a developer or other uses, but I am unlikely to live long enough to see that day. In any case, many of our farms are not in locations where that would even be possible in 10 or 20 years.
How much acreage do you currently own?
We have 33 farms across 8,370 acres, five different states and 12 growing regions. And the value varies hugely from region to region. In the Midwest a farm will cost anywhere between $3,000 and $10,000 an acre, whereas in California they start at $45,000 an acre and go all the way up to $100,000 an acre. That has to do with how much revenue and profit you can get from a farm. In the Midwest the growing season is shorter than in California and the climate is very different as well, so you can’t make as much money growing fruit and vegetables there.
Rents also move in line with farmland prices and rents on our lease renewals have gone up an average of 21 percent in the last couple of years, although this hasn’t affected occupancy at all; our farms are always occupied. Midwest rents did stabilise last year along with land prices, but California and other regions we are concentrated in are still increasing on both counts. This has mainly to do with the produce being farmed there such as fruits and berries that are increasingly popular with consumers.
Are there any other consumer trends that you are picking up on?
Organic is growing as an industry like crazy and we are feeling pretty good about converting some of our farms to organic. Some of the farms we own and rent to Dole are organic.
Where are your shares trading compared to the net asset value (NAV) of your farms?
We publish the NAV of our farms once a quarter and determine the value based on external appraisals of each farm, and internal valuations based on recent transaction comps in a specific region. Our latest NAV valued the REIT at about $14 a share but it is trading closer to $10 or $11 a share, so investors are getting a bargain every time they buy stock.
And the structure is fully transparent because we have to publish large financial documents every quarter as a listed public company, so investors can follow our progress very easily.
Do you use debt to acquire farmland?
We only use debt to magnify the equity returns. Now we can borrow against existing farms from the two government lenders Farm Credit and Farmer Mac. They lend 60 percent of the purchase price of each farm at rates between 3 percent and 4 percent. That means the return on equity is around 8 percent to 9 percent in the first year and continues to rise each year as the rents on the farms go up. And we tend to match our loans to the farmland leases. It’s very important to match the book in this way or you could get into trouble.
How often are your leases renegotiated?
Most of our leases are between 3 to 10 years. Many tenants are happy to have 10 or more year leases as they want to ensure they have farmland for a long period. Since most our leases are for longer terms, we will agree with the tenant to have annual increase for inflation and adjustments upward if needed every 3 years to ensure we are in line with market rents.
What are your plans in the coming months?
We are looking at expanding into some other farming sectors such as permanent crops and we do have a corn farm in Arizona which has lots of access to water. But commodity crops like corn and wheat are tricky and it can be very hard to judge whether a farmer will make money growing those crops because the price of grains is so volatile. We like fruits and vegetables because of the longer-term stability.